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Unconventional Monetary and Exchange Rate Policies

51 Pages Posted: 24 Feb 2017  

Joseph Gagnon

Peterson Institute

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Juan M. Londono

Federal Reserve Board of Governors

Christian Saborowski

International Monetary Fund (IMF)

Horacio Sapriza

Board of Governors of the Federal Reserve System

Date Written: 2017-02

Abstract

This paper explores the direct effects and spillovers of unconventional monetary and exchange rate policies. We find that official purchases of foreign assets have a large positive effect on a country's current account that diminishes considerably as capital mobility rises. There is an important additional effect through the lagged stock of official assets. Official purchases of domestic assets, or quantitative easing (QE), appear to have no significant effect on a country's current account when capital mobility is high, but there is a modest positive impact when capital mobility is low. The effects of purchases of foreign assets spill over to other countries in proportion to their degree of international financial integration. We also find that increases in US bond yields are associated with increases in foreign bond yields and in stock prices, as well as with depreciations of foreign currencies, but that all of these effects are smaller on days of US unconventional monetary policy announcements. We develop a theoretical model that is broadly consistent with our empirical results and that highlights the potential usefulness of domestic unconventional policies as responses to the effects of foreign policies of a similar type.

Keywords: Current account balance, Unconventional monetary policy, Foreign exchange intervention, Quantitative easing

JEL Classification: F36, F42

Suggested Citation

Gagnon, Joseph and Bayoumi, Tamim and Londono, Juan M. and Saborowski, Christian and Sapriza, Horacio, Unconventional Monetary and Exchange Rate Policies (2017-02). FRB International Finance Discussion Paper No. 1194. Available at SSRN: https://ssrn.com/abstract=2922988 or http://dx.doi.org/10.17016/IFDP.2017.1194

Joseph Gagnon (Contact Author)

Peterson Institute ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.piie.com

Tamim Bayoumi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Juan-Miguel Londono-Yarce

Federal Reserve Board of Governors ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Christian Saborowski

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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